Central Bank may ask banks to hold more capital

Central Bank may ask banks to hold more capital

Outgoing Central Bank Governor Philip Lane.
Photo: Bloomberg

The Central Bank of Ireland is seeking approval from the Minister for Finance to be allowed to impose new rules that would enable it to force banks to hold more capital, Governor Philip Lane said on Tuesday.

Speaking to students at University College Dublin, Lane also warned of the risks of running a loose budgetary policy at a time when the economy was getting close to its capacity limits.

Philip Lane

The idea of adding another capital holding requirement for banks is likely to go down badly with the private sector as it will increase their costs and comes at a time when European bank profitability is much weaker than that in the United States for example.

“Our plan now is to examine the potential additional contribution of the systemic risk buffer in ensuring that the banking system would be resilient in the event of a structural shock to the Irish economy,” Dr Lane said.

Ireland was one of two European Union countries that did not impose such a measure in 2012.

The measures are implemented in different across the EU, but the rates are set at 0.5-3.0pc of bank exposure and can target either domestic exposure or all exposure.

“The advantage of the systemic risk buffer is that extra capital would improve loss-absorbing capacity if a systemic risk event occurred. Furthermore, credit supply could be further protected by switching off the systemic risk buffer under such circumstances,” Dr Lane said.

Banks here already face strict rules on the amount of capital they must hold and the central bank has introduced tough mortgage rules to prevent a repeat of the lending bubble of the 2000s that led to the State bailing out the banks when the financial crisis hit.